Government action needed to tame inflation, economists say
June 11, 2008
By Ethel Hazelhurst
Johannesburg - The government should do more to make the economy competitive as a way to curb price increases, economists urged on Monday. The comments came ahead of today's monetary policy committee (MPC) meeting of the Reserve Bank. The MPC will announce whether the bank's official repo rate will be raised by half a percentage point or more.
The economists' proposals are likely to be as controversial as the inflation targeting framework that has prompted Reserve Bank governor Tito Mboweni to raise the bank's official repo rate by 4.5 percentage points over the past two years to 11.5 percent.
Despite the rate increases, the consumer price index excluding mortgage costs (CPIX), the bank's benchmark measure of inflation, has been above the 3 percent to 6 percent target range since April last year.
The reason is that monetary policy aims to reduce demand because as the cost of credit rises, consumers borrow less and therefore spend less. However, inflation is driven by high fuel and food costs, and interest rates can only contain the knock-on effect of the higher input costs. Therefore economists seek to beat inflation in other ways, rather than relying on monetary policy alone.
Chris Hart, an economist at Investment Solutions, said: "Open economies tend to have lower inflation as competition forces firms to become more productive." He suggested cutting import tariffs further to expose local producers to more competition from abroad. The proposal would be resisted by trade unions, who already blame the liberalisation of the economy during the past 14 years for job losses.
Hart also raised a number of regulatory and policy issues that had allowed certain sectors to be dominated by a single player or a handful of firms.
He mentioned the telecoms industry, where fixed-line operator Telkom recently lost its protected status and faced opposition from newcomer Neotel. Telkom's monopoly had kept bandwidth costs far higher than in other parts of the world.
He cited the banking sector, where a few major players were protected by the Reserve Bank's "four pillar policy", resulting in high banking charges. The Reserve Bank protected major players from too much competition because the collapse of a major bank would threaten the entire banking system.
Hart said cartels had operated for too long in the bread and dairy sectors. He suggested that fines imposed by the competition commission in cases of collusion and price-fixing should be used as seed capital to fund new entrants in these sectors.
He argued that better price-setting mechanisms would increase competition and thus also increase the number of jobs available.
Dawie Roodt, the chief economist at Efficient Group, described state-owned or partially owned companies, such as Sentech and Telkom, as causing obstructions to growth.
He called for liberalisation of the labour market to allow wages to respond more flexibly to change.
Roodt said the measures that would normally be used to curb inflation were not appropriate at the current stage of the cycle. These included increasing value-added tax to reduce consumption, which was already decreasing.
Nicky Weimar, a senior economist at Nedbank, said "a global supply response" was needed to address the high cost of food. "There is a lot of underutilised land in Africa. What is needed is infrastructure and access to better technology and know-how."
She added that regulatory changes to limit the speculative positions of institutional investors in the oil futures market would reduce the level of speculation and therefore temper the rising cost of oil.
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